“Take all the loans that have been extended, which are pushed into this wave, and something’s got to move.”
– Michael Cohen, Brighton Capital Advisors
Signs of commercial mortgage-backed securities distress include historically high levels of delinquency rates in office and multifamily buildings.
Indicators of distress for commercial mortgage-backed securities have now blown past levels seen in the sector during the Great Recession, pitting borrowers against lenders as $150.9 billion in such loans mature this year.
CMBS distress, overall, has increased each month for the past six months, according to an August report from commercial real estate data provider Trepp, and delinquency rates for multifamily and office buildings are at historic highs. In the office sector, more than one in 10 mortgage-backed securities loans are delinquent, an all-time high, and delinquency in the multifamily sector surged to a nine-year high of 6.86% in August, according to Trepp.
CMBS lenders typically have less flexibility to modify a loan than a bank lender, because of how they are structured. CMBS loans are governed by pooling and servicing agreements, which specify the maximum amount a maturity date can be extended. That maximum has already been reached in many cases.
“Extend and pretend is over,” said Joshua Wurtzel, a real estate litigation partner at Schlam Stone & Dolan LLP. “Between steady interest rates and declining property values, especially in the office and rent-stabilized markets, CMBS lenders are becoming more aggressive in moving against delinquent borrowers.”
Michael Cohen of Brighton Capital Advisors, a CMBS loan advisory firm that represents borrowers, said he noticed that special loan servicers became more aggressive in recent months, scrutinizing loan files for additional collateral.
With $150 billion in CMBS loans maturing this year, according to Trepp, Cohen is bracing for an onslaught of maturity defaults. Instead of cash-out refinancings, where rising property values allow borrowers to take out equity, borrowers will need to put in additional equity in order to refinance, and at a higher interest rate.
“Take all the loans that have been extended, which are pushed into this wave, and something’s got to move,” Cohen said.
